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Online Extra: India's Cipla: New Prescription Needed?

By Bruce Einhorn Over the years, India's pharmaceutical companies have specialized in making low-cost versions of Western drugs. One of the most successful has been Cipla Ltd

. During the 2001 anthrax scare in the U.S., for instance, the Mumbai-based company won attention by offering to provide an inexpensive generic version of Bayer

's Cipro, the most powerful anti-anthrax medicine.

Activists, angered by the high prices that Big Pharma companies charge for AIDS drugs, have also looked to Indian drugmakers like Cipla for relief. The company has been providing anti-retroviral (ARV) drugs to African countries that struggle with soaring numbers of HIV-infected people, and Cipla's sales to the continent grew 72% from 2002 to last year as a result. How big a price discount do Cipla customers enjoy? "What I sell for one rupee is available in the U.S. for one dollar," boasts Cipla Chairman and Managing Director Yakub Hameid. (One rupee is worth slightly more than 2¢.)

So far that formula has translated into impressive results for Cipla. The company's sales of $877 million in the fiscal year ended March, 2007, were up 19% year-on-year and profits rose 10% to $164 million. That has helped push Cipla into the No. 10 slot in this year's Asia BusinessWeek 50 rankings.

Undercut by NGOs Remaining the top Asian drugmaker will be challenging, though. The earnings picture for the current fiscal year is not promising. Credit Suisse (CS) analysts Neelkanth Mishra and Anubhav Aggarwal, in a research report from last month, predict that Cipla's sales will continue growing nicely, but profits will actually fall 2%. That's one reason that Cipla has been one of the worst-performing stocks this year on the Indian bourse. While the benchmark stock index is up 13% for the year, Cipla's shares have fallen 26%.

Ironically, one reason for Cipla's slowdown is the increasing clout of nongovernment organizations (NGOs) providing low-cost AIDS drugs to the developing world. The value of Cipla's sales in Africa, for instance, actually fell 3% in the year ended March, 2007. ARVs amount to a quarter of Cipla's sales, and the price that the Clinton Foundation (the NGO led by former U.S. President Bill Clinton that is among the leaders in helping African countries fight the AIDS epidemic) pays for ARVs fell by more than 35% between August last year and May this year, according to Credit Suisse. In May, the company and the foundation agreed to a plan to cut the cost of more than a dozen AIDS drugs in 66 countries.

Hameid says he doesn't lose any sleep over the company's stock market performance. "The Indian stock market," he says, "is overpriced and overrated." Instead, the Cipla chairman is focusing on boosting the company's long-term competitiveness.

One goal is to boost exports even further. Ten years ago, Hameid points out, Cipla's exports amounted to only 10% of total sales; today, they're half, and he wants that number to increase to 60%. In order to achieve that goal, Hameid is expanding Cipla's capital expenditure budget. It was $100 million in fiscal 2007, up 14% from the previous year, and will grow another 25% in the new fiscal year. Einhorn covers the Asian pharmaceutical industry from BusinessWeek's Hong Kong bureau